Inflation: The Tax Everyone Shrugs Off

The following data is concerning the United States. Similar data is harder to find in Canada.

Adam de Angeli from The Campaign For Liberty did some calculating and came up with the following:

. . .using the change in the price of gold seemed wiser than an arbitrarily made-up "95% purchasing power lost," mandating the change of entry title from 3% to 4%. The rest of the controversy is shown in the comments that follow.

Only 4%? That may sound like a pretty sensational statement at first. After all "since the Federal Reserve was chartered, the dollar has lost 95% of its purchasing power," people say. That surely sounds worse than a 4% tax rate. But fpr the loss to occur over a 95-year period, that's about what it was.

Assuming a 5% retained purchasing power since 95 years ago, X95 = 5% (0.05) where X is the percentage of value retained from one year to the next, solving for X we have .051/95 or .9689 (96.89%), subtract that from 100% for an annual average inflation rate of 3.11%.

Update: using price of gold for 1913 vs 2008, the average annual rate of change is 3.9%.

Of course, the danger of hyper-inflation is still very real, and the annual average over a century is no assurance that the pace of the problem isn't accelerating. But don't make the mistake of saying that inflation is the most severe tax--the culprit is still the income tax.

Of course the culprit is the income tax. Why should I live in a society where everyone else gets to tell me how much of my income I can keep? At least the government controls the income tax though, and at least they pretend to be a direct arm of the people.

Inflation is much more insidious. Inflation is an increase in the money supply. So when the central bank creates more dollars, they inflate the money supply. If you've ever taken microeconomics, you know when the supply of a good or service increases, the price, or value of that good or service decreases. This occurs with the value of our money as well. So if there is $10 billion in circulation and the Fed prints another $10 billion, as the money works its way through the economy the value of it will decrease (prices go up) to reflect the increase in supply.

This has a direct consequence to us. If you put $10,000 under your mattress and keep it there for a year, the central bank will rob you of $300 of that money simply by printing more cash. You'll still have the $10,000 under your mattress, you'll simply only be able to purchase $9,700 worth of goods a year ago.

Doesn't seem like such a big deal, but wouldn't it bother you if someone just took $300 out from under your mattress without your permission? Its the same thing, and done over long periods of time it is disastrous to the poor and the middle class. Its a redirection of wealth to bankers and those who are politically well connected. This is why there has been a perpetual increase in the income gap over the past 80 - 90 years.

ITS TAXATION WITHOUT REPRESENTATION. It is unethical and pure thievery.

Some will argue that this is balanced by a steady increase in wages. This is false. Even if wages kept with inflation, the increases only ever occurs after prices increase. The new cash goes to the banks who loan it out to big business who spend the cash before prices go up. Their spending of the cash forces prices up. The middle class is stuck paying these higher prices until they see a raise in wages that matches inflation. So even if wages increase with inflation, we will still see a perpetual redistribution of wealth to the upper classes and a robbing of the middle class and poor because the wages only go up after prices increase.

What we see in reality is that wages DO NOT increase with inflation. Today I read the following from Parade.com:

The Economy Booms, But Most Paychecks Don't

One reason for the widespread pessimism is that most Americans haven’t seen the nation’s economic boom reflected in their paychecks. Last year’s 1.1% average raise was their first real pay increase in a long time. Workers’ productivity grew an impressive 18% between 2000 and 2006—but most people’s inflation-adjusted weekly wages rose only 1% during that time. This was the first economic expansion since World War II without a sustained pay increase for rank-and-file workers. Typical 2007 raises will be small, experts say. They predict slower economic growth and higher unemployment this year.

In the last five years, all the salary gains went to the highest-paid workers, says Mark Zandi, chief economist at Moody’s economy.com. “ Average income” is a misleading statistic, he explains: If one of 300 million workers gets a $300 million raise, for example, and the other 299,999,999 get none, the average salary has risen—but only one person is earning more. “A better measure is median income—the midpoint between the top 50% of earners and the bottom 50%,” says Zandi. “And median income has struggled to keep up with inflation.”"

This is why I argue for gold backed currency. Gold keeps our economy honest. It restricts a central bank from simply creating cash and redistributing wealth. If you own gold, its value rarely changes. The price of oil versus gold has hardly changed since 1870. Moving toward a solid currency is the most moral action any government could take for the middle class. Think about all of the baby boomers on the brink of retirement but have been robbed of large portions of their pensions and retirement savings because they were forced to invest in stocks (mutual funds) to try to make returns greater than inflation. If they had bought gold, they wouldn't have lost a dime. The purchasing power of their savings would have stayed constant.